BANKS AND THEIR METHODS
=Service of the Bank to the Community.=—Practically all business houses
at the present time take advantage of the banking facilities to be
found in every community where there is enough business transacted
to justify the establishment of a bank. A bank is sometimes defined
as an institution which deals in money and credit. One of its chief
functions and the one on which its main income is _based_ is that of
acting as a place for the deposit of moneys, these deposits forming the
basis for its loans and discounts. Among its other important functions
and services are to collect drafts and checks drawn on other banks;
to issue and sell its own drafts on other banks, thereby enabling
its customers to make payments to out-of-town creditors; to discount
commercial paper, i.e., to loan money to its patrons on approved
security; and to issue paper currency.
=Opening an Account with the Bank.=—Because so much of the bank’s
business is based on the honor and integrity of its customers, a
prospective depositor is usually required to present a card of
introduction signed by a customer of the bank or someone else known to
it. A depositor who wishes to open a checking account is asked to file
a “signature” card bearing the signatures which he will use in signing
checks. As considerable expense attaches to handling depositors’
accounts, some banks require that the balance of the account shall
never fall below a fixed minimum.
=The Deposit Ticket.=—When an account is opened, the depositor is
provided with a pass-book and check book. All deposits are made by
means of deposit tickets, discount memoranda, or collection notices.
The deposit ticket is in form similar to the following:
[Illustration: Form 21. Bank Deposit Ticket]
All moneys and checks deposited are listed on this ticket under the
indicated classifications. The deposit is handed to the receiving
teller of the bank, who, after verifying the ticket, makes an entry of
the amount in the depositor’s pass-book. Duplicate deposit tickets are
usually kept by the depositor. It is important to note that checks must
be indorsed before they are deposited, so as to make them collectible
by the bank.
=The Pass-Book.=—The pass-book is the record of the depositor’s
dealings with his bank and, although written up by the bank teller,
it is usually kept from the depositor’s viewpoint, i.e., the bank is
debited with all deposits and credited with all checks presented for
payment. At stated intervals, say monthly, the book is left with the
bank for balancing, at which time the _total_ amount of checks paid
by the bank is entered in the pass-book and the canceled checks are
returned to the depositor. Sometimes the pass-book is kept in account
form, the left page indicating deposits, and the right page payments by
the bank. More frequently, however, the pages of the pass-book do not
have debit and credit significance but constitute a continuous record.
In this case, at the end of the period, the deposits are footed and
the total of the checks is _subtracted_ from the total deposits, thus
showing the balance due the depositor.
A method coming into quite general use among banks is to send a monthly
statement of account just as trading concerns do. This statement is
a transcript of the bank’s ledger account kept with each depositor,
showing deposits and withdrawals. When this is done, withdrawals are
not entered on the pass-book, which thus serves only as a memo or
receipt of the moneys deposited.
=The Check Book.=—The check book is provided either with a stub,
counterfoil, or interleaf, for making a duplicate record of the check
drawn. Provision is usually made in the check book for the entry of the
deposits. Sometimes each check is subtracted from the previous balance
and the amount of the new balance shown; more often, total checks and
total deposits are shown separately and in this way, while it is an
easy matter to find the balance by subtracting the total checks from
the total deposits, the actual figure does not appear and hence is not
available to curious eyes.
The balance shown in the monthly statement or by the periodic balance
of the pass-book is seldom the same as that shown in the depositor’s
check book, due to the fact that certain checks issued by the depositor
have not yet been presented for payment to the bank. The method of
reconciling the pass-book with the bank balance is treated in Chapter
L, “Accounts Current.”
=Securing a Loan through the Discount of a Note.=—A common practice
of business men in borrowing money is to discount or sell to their
bank or to a broker their own promissory notes and those received
from customers. When merchants discount their own notes at a bank,
the notes bear only one signature, that of the merchant, and for this
reason they are called “one-name” paper. If a merchant receives a note
from a customer, indorses it, and then discounts it at the bank, two
signatures appear on it—that of the original maker and that of the
indorser. Notes of this kind are called “two-name” paper. Banks usually
prefer two-name paper because, if the maker fails to pay the note at
maturity, the indorser can be held liable for its payment, while in the
case of one-name paper the bank has recourse to no one except the maker.
When a merchant makes out a promissory note of, say, $1,000 due 90 days
after date, and discounts it at his bank, the bank usually deducts
interest at, say, 6%, from the face of the note; i.e., the merchant is
credited not for the full $1,000 but only for $985, and when the note
matures he either pays the amount, $1,000, or his account is debited
with it. The $15 is called “discount” because it is “subtracted” from
the face of the note; but since this item is paid for the use of the
amount loaned by the bank, it is of the same nature as interest. There
is no reason, therefore, for keeping two separate ledger accounts, one
for discount and one for interest paid, the two usually being combined
under one title, “Interest and Discount” or “Interest.”
=Principles to be Observed in the Calculation of Interest.=—In
connection with interest computations it is important to observe the
following points, the principles involved in each case being best
explained by making use of suitable illustrations.
1. In commercial practice, when the interest period is expressed in
months, the interest for each month is one-twelfth of the annual
interest, i.e., a note for $1,000 dated April 11, 19—, due “three
months from date,” matures July 11 and the interest at 6% is 6% of
$1,000 divided by 12 multiplied by 3, or
$1,000 × .06 × 3
---------------- = $15
12
2. Were the same note worded “ninety days from date,” it would mature
_July 10_ instead of July 11, the number of intervening days being 19
in April, 31 in May, 30 in June, and 10 in July; total 90 days. The
interest would amount to
$1,000 × .06 × 90
----------------- = $15
360
3. If a note is dated March 6, 19—, and matures, say, on April 30, the
interest period is 55 days (25 in March and 30 in April). Usually, in
computing the number of days in the interest period the opening date
is omitted but the closing date is included. In some instances the
practice is to include both days.
It is important to note that it is almost a universal custom to use
360 as a denominator in all these cases, although the theoretically
correct number is 365. This is done for the reason that the use of
360 greatly facilitates the computation. The government of the United
States makes an exception to this rule and counts the year as 365 days,
and disregards the month as a unit base; i.e., instead of counting the
month of January as ¹/₁₂ of a year, its computation requires the use of
the fraction ³¹/₃₆₅ as the multiplier. Interest on $1,000 for, say, 12
days, by this method, amounts to
$1,000 × .06 × 12
----------------- = $1.97
365
instead of
$1,000 × .06 × 12
----------------- = $2
360
The incorrectness resulting from the commercial method (using 360
days as denominator) usually is negligible and is fully justified by
the economy of time in computation. It may be noted that under this
practice the amount of annual interest is ¹/₇₂ more than under the
method used by the government.
4. When paper is discounted by a bank, even though its term be given
in months, the bank invariably counts the exact number of days in
estimating the amount of the discount. Take a note dated June 25 with a
term of 3 months and due therefore on September 25, but discounted at
the bank on July 25. The term of discount, instead of being 2 months,
would be for 62 days, a gain to the bank of 2 days on a 360-day basis.
=Short Methods of Interest Computation.=—In calculating interest
or discount, the so-called 12% or 6% method seems the easiest of
application. Its base is taken as $1. In the 12% method the interest
for a year is therefore 12 cents, for a month 1 cent, and for a day ⅓
mill. In the 6% method, the interest for a year is 6 cents, for a month
½ cent, and for a day ⅙ mill. Using these fractions with the years,
months, and days as multipliers, the result is the interest on $1 for
the given period. This result multiplied by the face of the note gives
the required interest, assuming that the interest rate is 12% or 6%.
A variation of the above gives the following rule, somewhat easier
to apply. Reduce the time to days—using a 360-day year, 30-day month
basis; multiply the time by the face, point off three places (i.e.,
treat the product as mills), and divide by 3 or 6 according as the
calculation is on a 12% or 6% basis. If the basis used is 6%, but the
actual rate is different, add or subtract whatever aliquot part the
given rate is more or less than 6%; i.e., if the rate is 8%, add ²/₆ or
⅓; if 5%, subtract ⅙; etc. The following example will illustrate:
A note for $1,000 dated June 10, 19—, for 4 months,
with interest at 7%, was discounted July 30 at 8%.
Find the net proceeds. The note when due will be worth
$1,000 plus 4 months’ interest at 7%. That becomes the
basis for the discount calculation.
Applying the 6% method:
4 months = 120 days
Multiplied by 1,000 (face of note)
-------
120,000
Marking off 3 points 120
Take ¹/₆ (index for 1 day) ¹/₆
---
20 = interest @ 6%
Add ¹/₆ 3.33
----
23.33 = interest @ 7%
Add 1,000
--------
Value of note on October 10 1,023.33
--------
This amount (1,023.33) is the basis on
which the discount is to be figured.
Multiply by the term of discount (72 days[2])
1,023.33
72
---------
2,046.66
71,633.1
---------
73,679.76
---------
Marking off 3 points 73.68
Take ¹/₆ (day index) ¹/₆
---------
12.28 = discount @ 6%
Add ²/₆ or ⅓ 4.09
---------
16.37 = discount @ 8%
---------
Value of note on October 10 1,023.33
Less discount 16.37
---------
Net proceeds on July 30 1,006.96
=========
[2] The 72 days are arrived at as follows:
1 day in July
31 days in August
30 ” ” September
10 ” ” October
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72